International Remittances: Why Is the Shift to Digital So Slow?
Online origination and the cost of sending
By Xavier Martín Palomas, Digital Frontiers Institute, June 2018
Xavier Martín Palomas is a Stream Lead and Experience Director at the Digital Frontiers Institute (DFI) where he leads the Remittances in the Digital Age course. He has more than 15 years experience in the area of development finance and financial inclusion in Latin America, Asia, Africa, and the Middle East and holds undergraduate degrees in Economics and Industrial Psychology and an M.A. from the Johns Hopkins University School of Advanced International Studies.
Using a post office account in India. Photo credit: Subrata Adhikary, 2017 CGAP Photo Contest.
This week we celebrate the 3rd International Day of Family Remittances, which recognizes the crucial role of migrant workers who support families at home, and highlights the impact of remittances on economic development. It is also a good day to reflect on the global effort to bring down the average cost of sending remittances to less than three percent of the amount sent, and to eliminate transfers that cost more than five percent, by the year 2030. That is part of goal 10 of the 2030 Agenda for Sustainable Development. How do we get there?
For money transfer companies the biggest expense is creating and maintaining agent networks in both sending and receiving countries. So, in theory, accelerating global uptake of digital origination methods that make it possible to dispense with agents (at least in sending countries), should allow us to reduce remittance costs.
The push for remotely originated transactions is not new. This service was offered in the form of call centers that allowed customers to remit funds using a credit card when major remittance providers were just getting started. But, ultimately, customer uptake was slow and providers turned their focus to developing the agent system we know today.
The development of the Internet offered a fresh opportunity to digitize remittance origination, but after almost 20 years the market share of digital-only providers is still relatively small and providers like Western Union have reported that almost 90% of transactions are still originated in cash. Some of the newest mobile-centric digital providers are moving at a faster pace, but their volumes are still small compared to the total volume of remittances sent by industry veterans, and even compared to the volumes handled by the digital arms of these companies.
What are the barriers and how do we move past them?
Is it lack of financial access? This doesn’t seem to be the biggest problem in origination countries, where most migrants have access to bank accounts. On the receiving end, financial access is a bigger challenge, but it is important to remember that many money transfer agents are actually banks.
Is it lack of awareness? Do remittance senders simply not know that digital remittances are (on average) cheaper? It is certainly true that prices can be confusing, especially exchange rate adjustments, which can make it hard to identify the potential savings from switching to another provider. Nevertheless, migrant communities are very good at sharing knowledge and it’s hard to believe that they wouldn’t seek out the necessary information for remittances that they do routinely.
Is it lack of access to technology? When digital remittances were only available through computers and laptops, there may have been something to the idea that the technology itself was excluding customers, but today smartphone use is widespread, especially in origination countries. Sure, there is a learning curve to navigating mobile apps, but it is no more difficult to surmount than for the social networks or messaging apps that have seen a lot of success with migrants. And in any case, many remittance companies now offer their services directly on social networks.
So why hasn’t digital origination caught on?
I certainly don’t have a definitive answer, but I’d like to suggest a couple of potential explanations. First of all, we have to recognize that customers don’t always feel like they need to go for the cheapest option. We see this every day, in all aspects of life; a cup of coffee can be had for a wide range of prices. Although it is true that there is a certain commoditization of remittance services that offers little room for differentiation and forces companies to compete mainly on price, it seems that there are other factors, like being able to make a transfer in person at a familiar agent location, that customers are willing to pay for. This might be reflective of discomfort with using a digital product, or it could be that the agent-based product is well-known, trusted, and liked.
Second of all, customers value convenience. Many migrant workers receive their salary either in cash or as a check. Many money transfer agents are conveniently located in or near businesses that allow migrant workers to cash their payroll check and send a transfer at the same time and place. That might seem a lot more practical than going to a bank branch to make a deposit and then going online to send the money. So digital remittances have to compete not only on price, but also on a global customer experience and perhaps also value-added services, an issue we examine in Digital Frontier Institute’s course on Remittances in the Digital Age.
We’ve seen other industries in which market adoption of digital products has occurred at a sluggish pace. I tend to think that the shift to digital in the remittance space is just another example of this - it will happen, but it will take time, and we'll need to put better arguments in front of users.
But I’d like to hear your take on why uptake of digital remittances has been slower than hoped. Are we on the edge of a rapid revolution, or will the switch happen gradually, over many years? And of course, is digital origination a key to driving down remittance costs? Or do you have other ideas for how we can meet the SDG target in 12 years?
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